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An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20% – this 20% can be made up of direct and indirect percentages.

A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. The small business 15-year exemption further requires a company or trust to have a significant individual for periods totalling at least 15 of the years of ownership of the CGT asset.

The significant individual test is not the same as the control tests used to determine if an entity is ‘connected with’ another entity for the purposes of the $6 million maximum net asset value test or the $2 million aggregated turnover test.

Total small business participation percentage

An entity’s small business participation percentage in another entity at a time is the percentage that is the sum of:

the entity’s direct small business participation percentage in the other entity at that time, and

the entity’s indirect small business participation percentage in the other entity at that time.

Direct small business participation percentage

Companies

An entity’s direct small business participation percentage in a company is the percentage of:

voting power that the entity is entitled to exercise (except for jointly owned shares) or

any dividend payment that the entity is entitled to receive, or

any capital distribution that the entity is entitled to receive, or

if they are different, the smallest of the three percentages above.

All classes of shares (other than redeemable shares) are taken into account in determining an entity’s participation percentage in a company.

Example

Joe owns shares that entitle him to 30% of any dividends and capital distributions of Company X. The shares do not carry any voting rights.

Joe’s direct small business participation percentage in Company X is 0%.

End of example

Example

A company has two different classes of shares, A and B, which have equal voting and distribution rights. Isaac holds 20% of the shares of each class. The directors can decide to make a distribution of income or capital to either class of shares to the exclusion of the other class of shares.

In this situation, the company does have a significant individual. Isaac holds 20% of the voting power and, regardless of how the directors' discretion is exercised, Isaac will always receive 20% of any distribution made by the company.

However, if Isaac only held the class A shares and no class B shares, he would not be a significant individual. His right to receive the distribution is only notional, and dependent on how the directors exercise their discretion to make distributions.

End of example

Jointly owned shares

As a result of the March 2012 amendments, the voting power calculation is ignored where the shares are jointly owned, as neither owner would individually control the voting power on the jointly owned shares. This amendment applies from the 2006–07 income year.

Trusts

An entity’s direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the lower percentage of either:

the income of the trust that the entity is beneficially entitled to, or

the capital of the trust that the entity is beneficially entitled to.

An entity’s direct small business participation percentage in a trust (where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital) is the percentage of:

distributions of income that the entity is beneficially entitled to during the income year, or

distributions of capital that the entity is beneficially entitled to during the income year, or

The March 2012 amendments allow an entity another method to work out their small business participation percentage in a discretionary trust if, in the CGT event year, the trustee of the trust:

did not make a distribution of income or capital during the income year, and

had no net income or had a tax loss for income year.

The entity's direct small business participation percentage at the relevant time is worked out using the percentage of the distributions the entity was beneficially entitled to in the last income year before the CGT event year in which the trustee made a distribution.

An entity's small business participation percentage is zero if:

the trust had net income and did not have a tax loss, and the trustee decided not to distribute, or

the trustee has never made a distribution in the income years up to and including the CGT event year (including where the trust had no net income or had a tax loss in each of those income years).

Example

XYZ trust is a trust where entities do not have entitlements to all of the income and capital of the trust. The objects of the trust are Evan, Mario, Denise and Katrina.

After a bad trading year XYZ trust sells an asset and makes a capital gain. The trustee wants to exempt the capital gain under the small business 15 year exemption. One of the requirements is that the trust must have a significant individual (not necessarily the same individual) for at least 15 years.

XYZ trust has a tax loss and has made no distributions in the CGT event year. The trustee made a distribution of income in the year prior to the CGT event year, and in all the previous years except the income year 14 years before the CGT event year. The distributions made in that immediate prior year can be used to work out the small business participation percentages of Evan, Mario, Denise and Katrina for the CGT event year, and for the earlier year that the trustee was not able to make any distributions because the trust had no net income. These amendments allow the XYZ trust to satisfy the significant individual requirement, and if the other conditions are met, the trustee can disregard the capital gain under the small business 15 year exemption.

End of example

Indirect small business participation percentage

An entity’s indirect small business participation percentage in a company or trust is calculated by multiplying together the entity’s direct participation percentage in an interposed entity, and the interposed entity’s total participation percentage (both direct and indirect) in the company or trust.

An indirect interest can be held through one or more interposed entities.

The March 2012 amendments also allow an object of a discretionary trust (where entities do not have entitlements to all of the income and capital of the trust) to calculate their indirect small business participation percentage to be more than zero, where the trust had a tax loss or no net income for the income year. See Discretionary trusts with tax losses or no net income.

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